Govt caught between industrial growth push and tax shortfall

Factory output grew by 16.8 per cent in December, underlining the sharp turnaround in the country’s industrial sector. But it has also sparked speculation that the budget could set the tone for a phased withdrawal of fiscal stimulus measures announced last year to counter the downturn, reports Gaurav Choudhury.

Factory output grew by 16.8 per cent in December, underlining the sharp turnaround in the country’s industrial sector. But it has also sparked speculation that the budget could set the tone for a phased withdrawal of fiscal stimulus measures announced last year to counter the downturn.

The six percentage point cut in excise duty through 2008 and 2009 have left a gaping hole in public finances, forcing the government to borrow a record

Rs 4 lakh crore or 6.8 per cent of the GDP.

Till December, it has collected Rs 63,045 crore as central excise duty, and it appears unlikely that the budget estimates of Rs 106,477 crore will achieved.

“The government has little choice but to begin the much-needed process of fiscal consolidation in the upcoming

budget.” said Rajeev Malik of Macquarie Securities

The Reserve Bank of India has signalled its intent to lower inflationary expectations by withdrawing some liquidity.

Fiscal correction is widely expected to dovetail into tax reforms when the government rolls out a nationwide goods and services tax (GST) system during the latter part of 2010-11.

An official, who did not wish to be identified, said the budget could announce measures to enlarge the list of sectors for investment-linked incentives.

“Last year’s budget had allowed all capital expenditure in cold chains and energy pipelines as deduction, and this could be extended to all manufacturing sectors,” the official said.

“Alleviating roadblocks to new investment could provide the much-needed fillip to economic growth,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry.

India Inc, however, wants the stimulus package to continue.

“The stimulus packages need to be continued for some more months to sustain this industrial growth”, said Amit Mitra, secretary general of Federation of Indian Chambers of Commerce and Industry.